Germany’s state owned banks on the verge of collapse

Der Spiegel reports that Germany is facing its worst banking crisis since 1931, with the government fearing the domino effects of allowing the insolvent banks to fail. For now, capital infusions keep coming and instantly vanishing into thin air. Included in the report is a very interesting story on WestLB, a bank that was insolvent and which was initially turned away at the door when it went begging for capital to stay afloat. This shows how ugly can get: ” In a crisis meeting two weeks ago, the two savings and loan associations in North Rhine-Westphalia that own half of WestLB had to admit that they were unable to come up with €1 billion in fresh capital for the ailing bank. They insisted that it was up to the state to cover another €3 billion in risks.

But the state refused, arguing that the savings banks had declined to pledge their shares in WestLB to the state in return for its assumption of the risk, just as they had refused to bring in a private investor. The two sides became embroiled in heated negotiations, until Axel Weber, the head of the German central bank, the Bundesbank, intervened.

Weber proved to be persuasive. Köln-Bonner Sparkasse, a savings bank, had €340 million in deposits with WestLB, which it would be forced to write off if the bank went under.”